There is a key reason why emerging nations have been growing so quickly, which is associated with the increased mobility of global capital, a change in the political landscape and improvements in technology that have allowed that capital to travel around the world at a rate of knots that was not conceivable 20-30 years ago.
If those conditions are maintained, there is every chance that emerging nations can continue to expand very rapidly. But the question is what might change those conditions.
First, there is a risk is that emerging nations may not get on with each other. One of key things that must happen is for their own relationships to improve. Look at the relationship between China and India – it is not exactly the best. Such dynamics need to be resolved across the emerging world.
The second risk is that as these countries become bigger, there will be issues with regard to income distribution and access to resources. Will people who remain in rural poverty still believe they have the promise of becoming richer? That promise has to be credible and if it is not credible, the gap between rich and poor gets bigger, strains get bigger and that could lead to political upheaval.
The third risk is the attitude of the West towards emerging nations. If you are a US politician staring at three or four years of stagnation, 9% unemployment and rising long-term unemployment, who do you blame? Your own policymakers for letting a housing bubble develop, or for a lack of regulation? Your banks? Of course, if you are looking for a scapegoat, it is very easy to blame China or someone else.
We have been through 40-50 years of increasing global openness; it has really been the characteristic of the second half of the 20th century. But the characteristic of the first half of the 20th century was increased isolationism. That is the danger for the years ahead. Faced with disparities in US and Europe, we look for someone else to blame and we end up blaming the emerging nations and find a more protectionist situation arising.
Throughout the 20th century, different parts of globalization moved in different directions. Global capital markets are much more integrated than they used to be. But migration across borders is much lower than it used to be, at least in terms of percentages of populations. The US became what it is in the 19th century thanks to migration. It would be impossible to create the same thing in the 21st century.
Over past 100 years, we have seen both more globalization and less of it. The euro is an interesting attempt to try to resolve this tension by saying, ‘we want the good bits of more globalisation, but we also want to hang onto our national sovereignty’.
As it has turned out, the national sovereignty aspects of the story have become a bigger and bigger problem – in particular the relationship between creditor and debtor nations.
Part of the problem is that globalization is an idea that diminishes national sovereignty, makes individual democracies feel less powerful and electorates feel less sure of the future. We are now suffering a significant backlash.
The reason for this backlash is very obvious. Up until 2007, globalization delivered rising incomes for most people. Admittedly, there are countries in Africa that did not have that experience, but politicians almost everywhere could argue that GDP was growing. They could put to one side the increase in income inequality that was extreme, both in the US and UK, because those people that did not see particularly big increases in income did not really care because even if they lacked decent income growth, they could borrow, so debt rose dramatically.
Since 2007, the Western world suddenly finds itself with no growth, no place to borrow and massive income inequality. That is not a great recipe for supporting the continued embrace of globalization.
Stephen King is HSBC’s group chief economist. His comments are drawn from a panel discussion chaired by Emerging Markets on October 11.